MORE BAD NEWS: Credit Crunch Reaches the Rich
Two years ago, I was talking to a wealthy, private-banking client in Palm Beach and he made a startling confession. Banks, he said, were handing out loans with little or no collateral. Whether it was a mortgage for his $20 million mansions on Ocean Drive, or a business loan to invest in a Miami condo, the banks were doling out cash with few questions asked. “I look for one thing from my banker,” he told me. “I want them to say ‘yes.’ I don’t like ‘no.’ Right now, they’re saying yes to everything.”
Earlier this year, another private banking client in New York — also in the real-estate biz — told me he had taken out a $20 million loan with no collateral other than his signature. “My name is my collateral,” he said.
It’s easy to assume that the credit problems stemming from sub-prime meltdown won’t affect the rich. Conventional widsom says the rich have plenty of income and wealth to back up their loans. And, the thinking goes, the banks are unlikely to tighten their credit, since most of the lending problems are on the low end of the wealth ladder.
Yet we’re now starting to see the first signs of credit tightening at the top. According to this article in the Wall Street Journal by my colleague Lauren Schuker, the credit crunch is starting to hit loans for high-end art. Hedge funds, auction houses and specialty lenders have been among the first to pull back. “As these newer kinds of loans proliferate, concerns are rising in the art world that some borrowers could default or find themselves in over their heads,” she writes. “Art is notoriously tough to value, so if prices fall sharply, lenders could find that they’re holding collateral worth less than the loan it is backing.”
And what starts as a tightening in the most illiquid and risky of markets — art — could spread to more fundamental markets for the rich, like real estate and business loans. I’ve written before about how the rich are leveraged more than ever before, and have been funding their outsized lifestyles in part with credit. Now, it looks like some of that easy money may be coming to an end. And private bankers may start uttering an unfamiliar word: “No.”
Earlier this year, another private banking client in New York — also in the real-estate biz — told me he had taken out a $20 million loan with no collateral other than his signature. “My name is my collateral,” he said.
It’s easy to assume that the credit problems stemming from sub-prime meltdown won’t affect the rich. Conventional widsom says the rich have plenty of income and wealth to back up their loans. And, the thinking goes, the banks are unlikely to tighten their credit, since most of the lending problems are on the low end of the wealth ladder.
Yet we’re now starting to see the first signs of credit tightening at the top. According to this article in the Wall Street Journal by my colleague Lauren Schuker, the credit crunch is starting to hit loans for high-end art. Hedge funds, auction houses and specialty lenders have been among the first to pull back. “As these newer kinds of loans proliferate, concerns are rising in the art world that some borrowers could default or find themselves in over their heads,” she writes. “Art is notoriously tough to value, so if prices fall sharply, lenders could find that they’re holding collateral worth less than the loan it is backing.”
And what starts as a tightening in the most illiquid and risky of markets — art — could spread to more fundamental markets for the rich, like real estate and business loans. I’ve written before about how the rich are leveraged more than ever before, and have been funding their outsized lifestyles in part with credit. Now, it looks like some of that easy money may be coming to an end. And private bankers may start uttering an unfamiliar word: “No.”
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12:01 p. m.
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